BILL NUMBER: SB 1959 CHAPTERED 09/29/00 CHAPTER 892 FILED WITH SECRETARY OF STATE SEPTEMBER 29, 2000 APPROVED BY GOVERNOR SEPTEMBER 28, 2000 PASSED THE SENATE AUGUST 30, 2000 PASSED THE ASSEMBLY AUGUST 28, 2000 AMENDED IN ASSEMBLY AUGUST 25, 2000 AMENDED IN ASSEMBLY AUGUST 8, 2000 AMENDED IN SENATE MAY 8, 2000 INTRODUCED BY Senator Lewis FEBRUARY 25, 2000 An act to amend Sections 11690, 11699, and 11715 of, and to add Section 11690.5 to, the Insurance Code, relating to workers' compensation insurance. LEGISLATIVE COUNSEL'S DIGEST SB 1959, Lewis. Workers' compensation insurance: reinsurance bonds. Existing law provides for the regulation of insurers by the Insurance Commissioner. Existing law provides that every insurer desiring to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance shall maintain on file with the commissioner a bond, or a cash deposit in lieu of a bond, in favor of the commissioner as trustee for the beneficiaries of awards of compensation against the insurer, to the extent of that reinsurance. Existing law requires that the amount of the bond be based on the aggregate of the present values at 6% interest of determined and estimated future payments upon compensation claims. This bill would require an insurer or reinsurer desiring to have the ability to undertake that reinsurance to notify the commissioner of its intent to do so, and would impose a late fee for a failure to notify the commissioner. This bill would require the commissioner to establish a list of all insurers or reinsurers authorized to undertake that reinsurance, as specified. The bill would provide that if the reinsurer fails to maintain a bond or cash deposit as required, the commissioner may disallow all or a portion of any reserve credits claimed by the ceding insurers. This bill would also allow the computation of the amount of the bond to be based either on the aggregate of the present values at 6% interest or at the rate of the reinsurance company's investment yield as determined by the NAIC Insurance Regulatory System Ratio Number 5 for Property and Casualty Companies, whichever is lower, of determined and estimated future payments upon compensation claims, as specified. This bill would state it is not to be construed to alter or affect the deposit obligations of former self-insured employers as provided in a specified provision of the Labor Code. THE PEOPLE OF THE STATE OF CALIFORNIA DO ENACT AS FOLLOWS: SECTION 1. Section 11690 of the Insurance Code is amended to read: 11690. Except in the case of the State Compensation Insurance Fund or as provided by Section 11715, every insurer desiring admission for workers' compensation insurance, or desiring to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance, shall, as a prerequisite to admission, or ability to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance, maintain on file in the office of the commissioner a bond in favor of the commissioner as trustee for the beneficiaries of awards of compensation against the insurer, or against any other insurer upon a policy reinsured by that insurer, to the extent of that reinsurance. Every insurer or reinsurer desiring to have the ability to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance shall notify the commissioner, in the manner and form prescribed by the commissioner, of its intent to reinsure that insurance. In addition, a late filing fee shall be imposed on the reinsurer pursuant to Section 924 for a failure to notify the commissioner of its intent to reinsure the workers' compensation insurance. SEC. 2. Section 11690.5 is added to the Insurance Code, to read: 11690.5. The commissioner shall establish a list of all insurers or reinsurers authorized to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance. An insurer or reinsurer shall be authorized to reinsure the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance if it has complied with Section 11690. The commissioner shall publish a master list of those insurers or reinsurers at least semiannually. Any insurer or reinsurer providing the notification and deposit required by Section 11690 shall be added by addendum to the list at the time of approval, and shall be incorporated into the master list at the next date of publication. The list and addenda required by this section shall be published so that they are readily accessible to insurers and producers. The list and addenda required by this section shall also contain a notice that if an insurer enters into a contract of reinsurance with an insurer or reinsurer reinsuring the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance that is not authorized pursuant to this section, the ceding insurer may not be able to claim that reinsurance for reserve credit. SEC. 3. Section 11699 of the Insurance Code is amended to read: 11699. The bond shall be in an amount: (a) Not less than the sum of the following amounts computed, less credits and deductions allowable with respect to reinsurance in admitted insurers, as of the close of the last preceding December 31st in respect to workers' compensation insurance written subject to the workers' compensation laws of this state: (1) The aggregate of the present values at 6-percent interest, or at the rate of the company's investment yield as determined by the NAIC Insurance Regulatory Information System Ratio Number 5 for Property and Casualty Companies, whichever is lower, of the determined and estimated future payments upon compensation claims not included in paragraph (2), including in those claims both benefits and loss expenses. (2) The aggregate of the amounts computed as follows: For each of the preceding three years, 65 percent of the earned compensation premiums for that year less all loss and loss expense payments made upon claims incurred in the corresponding year from that 65 percent; except that the amount for each year shall not be less than the present value at 6-percent interest of the determined and the estimated unpaid claims incurred in that year, including both benefits and loss expenses. (b) Not less than one hundred thousand dollars ($100,000). (c) If the aggregate amount computed under subdivision (a) exceeds fifty thousand dollars ($50,000), not more than double the aggregate amount. SEC. 4. Section 11715 of the Insurance Code is amended to read: 11715. (a) Any workers' compensation insurer, or insurer that reinsures the injury, disablement, or death portions of policies of workers' compensation insurance under the class of disability insurance, may, in lieu of and for the same purpose as the bond required by Section 11690, and upon payment of the fee prescribed in this article, deposit cash instruments, approved letters of credit, or approved interest-bearing securities or approved stocks readily convertible into cash, investment certificates or share accounts issued by a savings and loan association doing business in this state and insured by the Federal Deposit Insurance Corporation, certificates of deposit or savings deposits in a bank licensed to do business in this state, or approved securities registered with a qualified depository located in a reciprocal state as defined in Section 1104.9. The deposit shall be made from time to time as demanded by the commissioner and may be made with the Treasurer, or a bank or savings and loan association authorized to engage in the trust business pursuant to Division 1 (commencing with Section 99) or Division 2 (commencing with Section 5000) of the Financial Code, or a trust company. A deposit of securities registered with a qualified depository located in a reciprocal state as defined in Section 1104.9 may only be made in a bank licensed to do business and located in this state that is a qualified custodian as defined in paragraph (1) of subdivision (a) of Section 1104.9 and that maintains deposits of at least seven hundred fifty million dollars ($750,000,000). The deposit shall be made subject to the approval of the commissioner under those rules and regulations that he or she shall promulgate. The deposit shall be maintained at a deposit value of not less than twenty-five thousand dollars ($25,000), nor less than the reserves required of the insurer to be maintained under any of the provisions of Article 1 (commencing with Section 11550) of Chapter 1 of Part 3 of Division 2, relating to loss reserves on workers' compensation business of the insurer in this state, nor less than the sum of the amounts specified in subdivision (a) of Section 11699. (b) Any workers' compensation insurer electing to bring itself within the provisions of subdivision (a) by submitting securities, stock, investment certificates, or share deposits registered in a depositor's name, shall execute a trust agreement in a form approved by the commissioner between the insurer, the institution in which the deposit is made or, where applicable, the qualified custodian of the deposit, and the commissioner, that grants to the commissioner the authority to withdraw the deposit as set forth in Section 11716. The insurer shall also execute and deliver in duplicate to the commissioner a power of attorney in favor of the commissioner for the purposes specified in Section 11690, supported by a resolution of the depositor's board of directors. The power of attorney and director's resolution shall be on forms approved by the commissioner, shall provide that the power of attorney cannot be revoked or withdrawn without the consent of the commissioner, and shall be acknowledged as required by law. (c) The commissioner shall require payment of one hundred seventy-seven dollars ($177) in advance as a fee for the initial filing and the first semiannual review of each letter of credit specified in subdivision (a). In addition, each workers' compensation insurer depositing a letter of credit shall pay an annual fee of one hundred eighteen dollars ($118) in advance on account of the letter until its expiration or revocation. This fee shall be for annual periods commencing each January 1 and shall be due and payable on the following April 1. (d) The commissioner shall require payment of one hundred eighteen dollars ($118) in advance as a fee for the initial filing of a trust agreement with a bank, savings and loan association, or trust company on deposits made pursuant to subdivision (a). An additional fee of one hundred eighteen dollars ($118) shall be payable for each amendment, supplement, or other change to the deposit agreement. In addition, the commissioner shall require the payment of fifty-eight dollars ($58) in advance for receiving and processing deposit schedules pursuant to this section. An additional fee of twenty-nine dollars ($29) shall be payable for each withdrawal, substitution, or any other change in the deposit. (e) Any workers' compensation insurer that elects to deposit cash or cash equivalents pursuant to this section shall be entitled to a prompt refund of those deposits in excess of the amount determined by the commissioner pursuant to subdivision (a). The commissioner shall cause to be refunded any deposits determined by the commissioner to be in excess of the amount required by subdivision (a) within 30 days of that determination. In the alternative, an insurer may use any excess deposit funds to offset a demand by the commissioner to increase its deposit due to the failure of a reinsurer to post a bond or deposit pursuant to Section 11690. (f) If a reinsurer has not maintained a bond as required by Section 11690, or has not maintained deposits as required by subdivision (a), or a combination thereof, in amounts equal to the amounts of deposit credits claimed by its ceding insurers, the commissioner, after notifying the insurer and its ceding insurers of the deposit shortfall and allowing 45 days from the date of the notice for the deposit shortfall to be corrected, may disallow all or a portion of the reserve credits claimed by the ceding insurers. SEC. 5. Nothing in this act shall be construed to alter or affect the deposit obligations required by Section 3702.8 of the Labor Code.